From the May 2006 issue of Wealth Manager Web • Subscribe!

May 1, 2006

Sitting Pretty

Tom Vaughan doesn't own a restaurant, but he served over 12,000 free lunches in the 1990s. Vaughan, founder and CEO of Retirement Capital Strategies LLC (RCS) in San Jose, Calif., had affiliated with LPL Financial Services (LPL) in 1990 after spending three years as a straight-commission salesman with First Investors Corp. He decided in 1993 to grow his financial planning and investment management business by hosting as many as three luncheon seminars every week at a local restaurant. The seminars helped Vaughan grow his practice from 100 clients and $10 million of assets under management (AUM) in 1990 to $70 million by 2001, when he ended the presentations because other advisors in his area were taking a similar approach.

Still, Vaughan wanted additional growth and he decided to pursue mergers with and acquisitions of other advisory firms in his area. He didn't plan at first to work exclusively with other LPL affiliates, although that's how the deals developed. The first acquisition came in May 2003, when RCS purchased a $33 million AUM LPL practice. The second deal took place at year-end 2004. RCS had grown to $140 million AUM by that time and the firm merged with Neri Financial Services, a similarly sized LPL affiliate owned by Camilla ("Cam") Neri, CFP. In June 2005, RCS acquired a $100 million AUM LPL affiliate in Napa, Calif., and the next deal--another merger--is scheduled for January 2006. As of December 2005, RCS had 15 employees in three offices: two managers, five client-relationship managers and eight operations staff serving 1,700 clients with $380 million AUM. Sixty percent of the (combined) clients had a fee-based relationship with the firm; the remainder had brokerage accounts or other commission-based arrangements. Eighty percent of the original RCS clients had fee-based relationships, and one of the company's intermediate-term goals is to reach the 80 percent fee-based level among all clients. Clients have reacted well to the combined operation: 94 percent of them have continued their relationships with RCS.

Two features distinguish RCS's business strategy. First, Vaughan has found that none of his peers among LPL's larger fee-based advisors are actively seeking growth via mergers and acquisitions. He attributes that condition to a lifestyle choice by the other advisors. "They want to be financial planners, not managers, and avoid having a lot of staff," he says. "I'm not a CFP, although I've paid for the program twice. My goal is to own a growing business, and that business happens to provide financial-planning and money-management services as its product. I don't mind having employees. It's a business-building approach, and I've realized that achieving scale requires employees."

The second feature is a conscious decision to attract and retain a variety of investors. Vaughan has observed that his peers are uniformly pursuing wealthy clients and in many cases they have stopped servicing smaller accounts. In contrast, roughly 800 RCS clients have less than $100,000 in assets with the firm. Vaughan is implementing a tiered-service model based on account size, but he has no plans to drop the smaller accounts. In fact, he believes that this group can be served profitably, provided RCS can develop a workable model and infrastructure. "I want to experiment with a small-client practice that will be highly efficient and technology driven," he says. "Smaller clients at other firms get reactive services, which means if they call in they get something taken care of. I would like to create a model that handles those clients."

There is a common thread behind these two plans: Vaughan is implementing the "blue ocean" business strategy developed by W. Chan Kim and Ren?e Mauborgne in their book, Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant (Harvard Business School Press, 2005). A red (as in bloody) ocean symbolizes a hotly contested market with companies following similar strategies and competing for the same customers. For advisory firms, this means marketing to and working with a smaller number of wealthy clients, which seems to be the universally accepted wisdom today. Companies following a blue ocean strategy attempt to create an uncontested market space with the goal of creating and capturing new demand. Vaughan sees his plan of growth through mergers and acquisitions and the decision to service less-affluent clients as blue ocean strategies, but he recognizes the risk that the contrarian approach might not pay off. "It's either blue ocean or I'm just dead wrong," he says.

This willingness to go it alone has also influenced RCS's technology decisions. Vaughan grew up in Silicon Valley and has been interested in computers since he was very young. During RCS's early years, the practice ran on a Microsoft Access database that he developed. LPL's policies also encourage affiliates to get involved in setting up customized systems. The company offers a range of practice-management applications, but planners have the option of working with outside vendors. Consequently, RCS uses a mix of LPL applications and external programs, depending on which option best fulfills the perceived need. For example, Vaughan says, LPL's BranchNet is the best solution for tracking commissions. BranchNet also includes communications programs that notify planners about account-opening requirements and other operations tasks. "Those are two instances where you would have more difficulty operating your office if you used outside software," Vaughan says.

The practice of allowing planners to use outside software creates a challenge when practices merge, however. RCS uses MoneyGuide Pro for financial planning and Junxure-i for contact and workflow management. (See table for additional details on RCS software.) Neri Financial Services uses Lumen Systems' software for financial planning and Maximizer for contact management; the Napa office uses ACT! and the firm scheduled to merge in January has Easy Money for contact management. Neri is switching to MoneyGuide Pro and Junxure-i and the new office also will adopt Junxure-i, but the changeovers can be a challenge, according to Jay Shinn, RCS's technology manager. The data must be transferred between programs, a process that introduces the risk of incomplete or potentially corrupted data, and the staff and planners joining RCS must learn how to use the new programs.

There are several other instances of the combined offices using different software for the same purpose. RCS uses Quik!, a program that populates forms by pulling the data from Junxure-i. Neri's staff uses BranchForm, an LPL form-completion application that works only with LPL's internal forms. These differences are relatively minor, but portfolio-management software has been more problematic and the firm has not settled on a single program. RCS uses LPL's Portfolio Manager, but Neri uses dbCAMS because it provides functions that she needs for data downloads on accounts held away from LPL. She plans to keep using dbCAMS until Portfolio Manager provides the functions she needs, which means RCS must operate two portfolio-management programs for the foreseeable future.

RCS has spent an average of $30,000 per year on technology in recent years. Purchases have been motivated by a desire to increase productivity, improve customer service, or both. The need for productivity is critical because the acquisitions and resulting increase in clients has stretched the firm's advisory staff. The 1,700 client accounts were divided among the three client-relationship managers and their assistants; Vaughan hired two more relationship managers in December 2005. The high cost of doing business in Silicon Valley is another motivation. Vaughan describes office rents and salaries in the area as "incredibly expensive," and the firm continually searches for technologies that enable it to service more clients without adding office space and staff. "We always ask, 'How can we have eight operations people do the work of ten?' If I have to pay someone a $60,000 annual salary and my peer in Texas pays just $30,000, I'll spend the money on technology so the $60,000 person can do three times as much as the Texas employee," he says.

Vaughan doesn't make tech investments in a vacuum, however. He has authorization for one-time or annual recurring expenses below $5,000, but amounts above that limit require an initial consensus from the firm's management group. RCS pairs that requirement with a unique compensation and investment scheme that Vaughan developed based on management articles he had read over the years. RCS deducts overhead expenses, not including salaries, from its gross revenue. Seventy-five percent of the remainder goes into an incentive pool that is used to pay salaries. No one at RCS receives a fixed salary: all incomes are tied to the size of the incentive pool. The 25 percent balance goes to a growth pool, which is used for large technology expenditures or to acquire other practices. Vaughan provides an example. "Assume we have $200,000 of revenue and $50,000 of overhead costs in a month," he says. "That leaves $150,000 of what we call gross profit. Seventy-five percent ($112,500) of that amount goes to the incentive pool, and the remaining $37,500 goes into the growth pool."

When RCS management identifies a technology or acquisition that requires a large investment from the growth pool, they must convince the staff that it is a worthwhile expenditure. To do this, Vaughan develops a capital budgeting analysis to show the investment's potential payoff. The key to selling staff on the investment is self-interest: If an expenditure will improve productivity by reducing operating costs or increasing revenues without adding overhead, the incentive pool will grow and generate more income for the entire staff. Vaughan says that employees approve most expenditures but they have rejected some proposals.

RCS's adoption of Internet telephony (voice over Internet protocol or VoIP) and video conferencing at the San Jose and Napa offices illustrates the firm's approach to improving productivity and customer service through tech investments. The firm receives an average of 50 incoming calls each day. During the 1990s, the company hired local college students for the receptionist/switchboard job. In 2001,Vaughan decided to make that position more productive, and his stepmother, Doris Vaughan, took over the job. Mrs. Vaughan had her Series 7 license since 1996 and she knew most of the firm's clients. Moving her to the lobby and subsequently installing VoIP and video conferencing accomplished multiple goals. Because Mrs. Vaughan knew the clients, she provided a welcoming presence when they arrived or called. (In her own words, she "can talk to a telephone pole.") She could also handle clients' telephone requests for trades and account information from her workstation in the lobby, which reduced the workload on the firm's client managers and traders.

The VoIP and video conferencing combination helps the firm increase the percentage of calls that reach the intended party and avoid voice mail. The VoIP software allows Mrs. Vaughan to see who is on the phone; if the requested staff member is available, she can forward the call directly or announce the call to the recipient before transferring it. Each RCS staff member is required to carry a cell phone and keep it turned on, and the phone software treats each cell phone as a virtual extension. This allows staff members who are available to answer calls from any place where they can receive a signal, including locations in the office but away from their desks. As a last resort, Mrs. Vaughan can connect to the desktop video camera that is installed at each employee's desk. That allows her to see if the employee is at his or her desk and just missed the call or is out of the office before transferring the call to voice mail. The video conferencing software has enhanced intra- and interoffice communications in other ways, as well. Tom Vaughan uses it to record and distribute video e-mails to the staff. Staff members use it frequently, particularly when they need to contact someone in one of the remote offices, and they share an initial impression that video conferencing is often more productive than voice calls.

VoIP will play a key role in RCS's plans to establish a small-client practice, although that business model and the supporting technology are still in development. Vaughan plans to spend more time on that initiative after the January 2006 merger is completed, but he envisions that the practice will operate similarly to a Merrill Lynch client call center. The model will incorporate proactive telephone-based service, possibly in the form of an annual 30-minute conversation with an RCS advisor. "Right now, that's not happening with these small accounts," Vaughan says. "Nobody is doing it because they can't afford to do it. There is no way you can meet one-on-one with these clients in the office. If you had an automated dialer that called out and populated the screen with the client's data as the client answered, the advisor could speak intelligently about the account, add information to the database, and know what to follow up on. If we can do this, then I can get these clients practically for free because everyone else is dumping them. But the technology will be vital--the model won't work without it."

Ed McCarthy, CFP, is a freelance writer in Rhode Island.

Tech Table for RCS Profile

Financial Planning Software

Cash flow

MoneyGuide Pro

Education

MoneyGuide Pro

Estate tax

MoneyGuide Pro

Income tax

MoneyGuide Pro

Retirement

MoneyGuide Pro

Portfolio Management Software

Asset allocation

LPL Portfolio Report Tool

Custodial/trading interface

LPL BranchNet

Reporting

LPL Portfolio Manager

Network Hardware and Software

Additional servers: Web, e-mail

MS Exchange 2003, Terminal Server 2003

Paperless Office Technologies

Scanners and scanning software

Toshiba e-Studio 351c

Filing systems

Junxure-i

Client-Relationship Management Software

Outlook 2003, Junxure-i

Communications

Internal software (scheduling, document exchange, etc.)

Outlook 2003, Junxure-i

Intranet / Notes / Web collaboration, etc.

Exchange 2003, VoIP telephony

Data lines

Fractional T-1, DSL, broadband

Web conferencing

Polycom PVX video/audio conferencing on desktops

Remote communications tools for staff (including wireless data)

Wireless 802.11 a/b/g

Network security (including VPNs, firewalls, etc.)

Watchguard Firebox firewalls

Business Management Software

Accounting, bookkeeping

QuickBooks Pro

HR

TimeClock Plus

Project management

Custom Microsoft Access database

Form completion

Quik!, LPL BranchForm

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